Small Business Economic Trends - July 2012
Summary
OPTIMISM INDEX
There was no good news in the June survey. The Small Business Optimism Index posted a decline of 3 points, falling to 91.4. This is a clear indication of slow growth. Only one of the ten Index components improved, expected credit conditions. Labor market indicators, spending plans for capital equipment and inventories took a drubbing, accounting for about 40 percent of the decline. Neither the SCOTUS decision or the highway spending bill effects are included in the June data.
LABOR MARKETS
Forty-four (44) percent of the owners hired or tried to hire in the last three months and 33 percent reported few or no qualified applicants for positions. The figures suggest that job creation has been very weak. While reports of reductions in employment have returned to “normal” levels, the percent reporting increases in employment has not. The percent of owners reporting hard to fill job openings lost 5 points, falling to 15 percent of all owners. The Household survey indicates that about 3/4s of the increase in jobs last month were “part time for economic reasons.” That is not a strong labor market. Seasonally adjusted, the net percent of owners planning to create new jobs fell 3 points to 3 percent, an unfortunate reversal of three months of improved readings. This is definitely not typical of an expansion.
CAPITAL SPENDING
The frequency of reported capital outlays over the past six months dropped 3 points to 52 percent. So, it appears that spending remains in “maintenance” mode. The percent of owners planning capital outlays in the next 3 to 6 months declined 3 points to 21 percent, a dispiriting result. Only five percent characterized the current period as a good time to expand facilities (seasonally adjusted), down 2 points. Of those making expenditures, 37 percent reported spending on new equipment (unchanged), 18 percent acquired vehicles (down 6 points), and 11 percent improved or expanded facilities (down 3 points). Five percent acquired new buildings or land for expansion (down 2 points) and 13 percent spent money for new fixtures and furniture (unchanged). Overall, the stats are consistent with the sluggish performance of the economy.
INVENTORIES AND SALES
With the large decline in reported positive sales trends, it is surprising that this indicator did not worsen. For all firms, a net 0 percent (unchanged) reported stocks too low, a very positive report. Overall, it appears that small business owners have reduced inventories to acceptable levels given the outlook for sales growth which deteriorated from May figures. Plans to add to inventories lost 2 points, falling to a net 0 percent of all firms (seasonally adjusted). With expected business conditions and expected real sales delivering poor readings, it is not surprising that inventory demand remains weak. The pace of inventory reduction slowed a bit, with a net negative 7 percent of all owners reporting growth in inventories (seasonally adjusted), a 1 point improvement.
The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months lost 7 points, falling to negative 5 percent, this after reaching a 5 year high of a net 4 percent in April. Twenty-three percent still cite weak sales as their top business problem, historically high, but down from the record 33 percent reading in December, 2010. The net percent of owners expecting higher real sales lost 5 points, falling to a net negative 3 percent of all owners (seasonally adjusted), producing a 4 month decline of 15 percentage points.
INFLATION
Twenty-one (21) percent of owners reported raising their average selling prices in the past 3 months (unchanged), and 19 percent reported price reductions (up 2 points). Seasonally adjusted, the net percent raising selling prices was 3 percent, unchanged from May. There is not much pressure on prices coming from Main Street, good news for the Federal Reserve. Seventeen (17) percent plan on raising average prices in the next few months (down 3 points after a 5 point decline in May), 3 percent plan reductions. Seasonally adjusted, a net 16 percent plan price hikes, down 1 point. Clearly, many owners do not see demand as strong enough to support higher selling prices.
EARNINGS AND WAGES
Reports of positive earnings trends gave up 7 points, falling to a negative 22 percent in June. For a brief moment, it looked like profit trends were turning around, but the positive burst was short-lived. Four percent reported reduced worker compensation and 18 percent reported raising compensation, yielding a seasonally adjusted net 13 percent reporting higher worker compensation, down 3 points. A net seasonally adjusted 7 percent plan to raise compensation in the coming months, down 2 points from May. Clearly the gains in compensation are not being passed on to consumers through higher selling prices.
CREDIT MARKETS
Ninety-three (93) percent of all owners reported that all their credit needs were met or that they were not interested in borrowing. Twenty-nine percent reported all credit needs met, seven percent reported that not all of their credit needs were satisfied and 51 percent said they did not want. Only 3 percent reported that financing was their top business problem. Twenty-nine (29) percent of all owners reported borrowing on a regular basis, down 3 points from May. A net 7 percent reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), down 2 points. The average rate paid on short maturity loans was 6.3 percent, stuck at much the same level for years.
COMMENTARY
The Index plunged 3 points in June, that’s a lot. The 10 Index questions lost a total of 30 percentage point in net favorable responses. The impact of the SCOTUS decision on health care will show up in the July survey as it occurred late in the month, ditto for the transportation bill which didn’t make much of a news splash. The health care decision was probably not what most owners expected, so “disappointment” over that will be reflected in the July survey responses. With over 20 new taxes ($800 billion) and most of the regulations yet to be written by HHS, the implications for employee costs remain unclear.
The rumored hiring of thousands of IRS agents to enforce the health care rules will certainly add to employment and Gross Domestic Product (GDP) since our accounting rules simply assume that the value of the output produced by a government worker is equal to their wage. An equal number of workers using their personal savings to produce a new services that did not sell would add nothing to GDP as no sales were registered and no income received. Job creation will be very weak in June and plans for July look even worse, so there will be very little progress on the jobs front in the coming months. No inflation issue on Main Street and there is nothing the Federal Reserve can do to increase employment. Rates are as low as they have ever been and more reductions will not help, but the promise of more action by the Federal Reserve will keep Wall Street busy and appease Congress.
The economy definitely slowed mid-year, not a huge recession threat but slower than earlier in the year. Job growth will be far short of that needed to reduce the unemployment rate unless lots of unemployed leave the labor force. NFIB members didn’t add a lot of jobs and don’t plan to in the coming months. Capital spending and inventory investment also weakened. Expectations for improvements in sales and business conditions faded, so no reason to hire additional workers or buy new inventory. “Political uncertainty” remained historically high as the reason why the current period is not a good time to expand. All in all, this month’s survey was a real economic downer.
This survey was conducted in June 2012. A sample of 3,938 small-business owners/members was drawn. Seven hundred forty (740) usable responses were received – a response rate of 19 percent.
Bill Dunkelberg, Chief Economist for the National Federation of Independent Business
Copyright 2012, the NFIB retains ownership. All Rights Reserved.
